ACM-INSIGHT! Into The African Banking, Insurance And Capital Markets
AN APPLIED CAPITAL MARKET LTD (ACM) PUBLICATION
JAN – APR 2011
GHANA Ghana’s Financial Market
A critical insight into GHANA’S fast growing financial marketS sector
The State of Ghana’s Economy AN ANALYTICAL OVERVIEW OF ghana’s economy
Eureka! Oil In Ghana
A detailed analysis into the recent oil discovery in Ghana
Corporate Bond Market Hullabaloo! African Capital Markets Update Kenya’s Market At A Glance
UK: £5.00 US: $7.00 Europe: €5.50 Nigeria: ₦1,200 Kenya: Ksh630 Ghana: ₵12
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ACM acm-insight! INSIGHT
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The wait is over! Welcome back to ACM-Insight! your periodic e-magazine on the African Banking, Insurance and Capital Markets containing analyses, educational materials, academic articles, capital market updates and lots more. You will notice that we have revamped the look with a more stylish design. This is brought to you courtesy of Applied Capital Market Limited (ACM) (experts in capital market product development, cutting-edge financial risk management solutions, value-added training and distinctive consultancy services). Thank you for your many comments and compliments on our previous editions. Your encouragement has spurred us on to produce this new action-packed edition. In this edition of ACM-Insight!, we have a special focus on Ghana, one of the most promising African countries in respect of future prospects. The Republic of Ghana, rich in agricultural resources, timber, gold, cocoa and other valuable minerals, abundant with educated, skilled and enterprising people, blessed with a stable form of government and dedicated to the principles of free enterprise, has long been seen as one of Africa’s most promising countries. Therefore, three main articles delve into Ghana’s financial markets, its economy and the future prospects in view of the recent oil discovery. Following up from our in-depth analytical article in the previous edition (Corporate Bond Markets Now!), we have, in this current edition, a piece titled “Corporate Bond Market Hullabaloo!!!” looking at some of the pitfalls that should be avoided in the rush to issue corporate bonds. In addition, our regular feature sections: African Capital Markets Update and African Markets at a Glance are back with interesting insights. We know you have had to wait a while for this edition, but we hope you will appreciate the quality that we have put into it. To ensure you never have to wait so long for your next edition of ACMInsight!, and because we know how much you enjoy and benefit from the analyses that we provide, going forward, we will publish three editions a year: January-April; May-August; and SeptemberDecember. This publication is therefore the January-April 2011 edition. Please forward to all your colleagues who may be interested in this publication. Don’t forget to visit our website at www.acm-consult.com. To subscribe FREE to future editions, please click “Subscribe” OR email us at email@example.com including your full name, position, organisation and contact details.
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The editorial team provide a brief overview of this edition and give an indication of what readers can expect from ACM-Insight! going forward.
Ghana’s Financial Market
A critical insight into the fast growing financial market sector in Ghana and, in particular, Ghana’s banking sector and how it has been transformed over the last decade; with a view on the expected buoyancy going forward.
12 The State of Ghana’s Economy An analytical overview of the economy as a whole including its current budget and forecast, macroeconomic indicators, impact of the global crisis, immediate and future plans, investments, untapped investment potential and infrastructure funding etc.
20 Eureka! Oil in Ghana A detailed analysis into the recent oil discovery in Ghana, exploring issues, opportunities and challenges facing Ghana; and a look at how oil can be managed effectively for sustainable fiscal and economy growth.
“Ghana boasts one of the most promising markets in sub-saharan Africa”
26 Corporate Bond Market Hullabaloo! 29 CBN’s Review of the Universal Banking Model – ACM’s Response REGULAR FEATURES
32 African Capital Markets Update This regular section of ACM-Insight! is dedicated to African capital markets update and comparisons with developed economies, and the main focus will be on the frontier African countries.
40 African MarketS at a Glance (Kenya) This regular feature of ACM-Insight! is dedicated to providing brief insights into the economies of Africa, focusing on key facts, as well as financial and capital markets facts. It is hoped that this will give potential investors a quick glimpse into the major African nations that are ripe for investment.
ACM’S EXPERT COMMENTARY IN THE MEDIA ACM actively provides expert and insightful commentary in the media. Below, you will find links to a selection of these: • Corporate Bonds from issuers’ perspective, BusinessDay • S ystemic risk in Nigeria’s financial sector: The margin loans crisis, BusinessDay • Margin Loans: Nigeria’s Own “Subprime” Lending Crisis, Risk Professional Magazine – June 2010 Edition.
Broadly speaking, the Ghanaian economy can be mainly grouped into financial services (banking, capital markets and insurance), agriculture, mining & extractive industries and public services. However, in this edition of ACM-Insight!, we shall focus on the Banking and Capital markets, the recent Oil Discovery and the Economy, especially in terms of potential future growth.
– april 2011
Ghana’s Financial Markets Ghana boasts one of the most promising emerging markets in the Sub Sahara Africa (SSA) and this can be attributed to various factors including the development of its financial services sector over the last ten years or so, debt relief program under the Multilateral Debt Relief Initiative (MDRI) which saw significant reduction in its external debt, rise in the activities of the private sector, rejuvenated Government and Public Sector reforms, improved Regulatory Framework that is, the role of the Bank of Ghana (BoG), Ghana’s Central Bank, in ensuring capital adequacy, compliance and competitive markets that gives Ghanaians choice.
hana boasts one of the most promising emerging markets in the Sub Sahara Africa (SSA) and this can be attributed to various factors including the development of its financial services sector over the last ten years or so, debt relief program under the Multilateral Debt Relief Initiative (MDRI) which saw significant reduction in its external debt, rise in the activities of the private sector, rejuvenated Government and Public Sector reforms, improved Regulatory Framework that is, the role of the Bank of Ghana (BoG), Ghana’s Central Bank, in ensuring capital adequacy, compliance and competitive markets that gives Ghanaians choice.
This is in addition to significantly improved banking services, and external funding from IMF and World Bank to plug the fiscal funding shortfall etc.
Banking History It was once the case that the likes of Colonial Bank (now Barclays) and Bank of British West Africa (now Standard Chartered Bank) dominated the banking sector in Ghana. These banks only catered for a minority of people (mainly expatriates and a small number of Ghanaian elites). The cost of accessing banking services was high and, so, it was not affordable for the vast majority of the population. This meant that the majority of Ghanaians had to settle for the limited services provided by the state-owned banks i.e. the Ghana Commercial Bank (GCB), Agricultural Development Bank (ADB) and Social Security Bank (SSB, now referred to as SG-SSB).
... This meant a majority of Ghanaians had to settle for the limited services provided by the state-owned banks ... It was common in those days to observe long queues outside the state-owned banks at the end of the month when government workers got paid their monthly wages. How quickly things have changed in the Ghanaian banking sector! The current active state of the banking sector is really quite exceptional in comparison to its recent past. This has been partly due to the intervention of the BoG in its capacity as the banking regulator, the adoption of cutting edge technologies and influx of foreign banks. focus on ghana
Nigerian banks in particular have expanded significantly into Ghana in recent years, with the likes of Guaranty Trust Bank, Zenith Bank, Intercontinental Bank, United Bank for Africa etc. The largest bank on the African continent, Standard Bank of South Africa (parent company of Stanbic Bank Ghana) also made a move into the country. The strategic moves by these banks to capitalise on the prospect of offering competitive services have been a welcomed development for the Ghanaian economy, creating greater competition and raising the standard of banking services. Resulting from these developments has been huge growth in the banks’ assets which has grown to approximately GH¢15 billion as of May 2010 according to the Governor of the BoG, Kwesi Amissah-Arthur.
Structure of the banking sector The past five years or so have seen a phenomenal growth in the Ghanaian banking sector. It is relatively well capitalised, liquid, profitable and recording strong asset growth. There are 26 Deposit Money Banks (DMBs) in Ghana. 25 of these have Class 1 banking licences1 and one has a general banking licence2. There are (13) foreign banks as well as thirteen (13) Ghanaian owned DMBs. There are 134 Rural and Community Banks (RCBs) and 47 Non-Bank Financial Institutions (NBFIs). There is a recapitalisation programme ongoing in Ghana at the moment with the intention that all banks must have a minimum paid-up capital requirement of GH¢60 million. Foreign Banks were required to meet the GH¢60 million by end of 2009 and the local banks have up until end of 2012 to attain this level of capitalisation, but are required to reach GH¢25 million by end of 2010. New minimum capital levels were also announced for savings and loans companies and finance houses with the mandatory capital pegged at GH¢7.0 million. Existing companies are required to attain GH¢4.0 million by end December 2011 and GH¢7.0 million by end December 2012. However, new banking licence applicants are required to meet the new minimum capital requirement from the start. The new minimum paid-up capital requirement may serve as a risk buffer, but increased competition, growing customer demands, and changing regulations are likely to continue to add complexity to business models of banks and the information technology environment. Therefore, it is imperative that the banking sector strives to continue to improve by considering the implications of expansion and
increased complexity on risk management and operational efficiency. The BoG, in its role as the banking regulator, should play an active part in ensuring this. The pursuit of excellence and financial stability must be the twin-aim of the banking sector (and the BoG) and once these are kept in mind, especially during expansion, profitability will undoubtedly continue to improve.
Ghana’s banks as causing the deterioration in asset quality.
Branch network For emerging economies, one of the most important factors in financial development is financial inclusion.
The past five years have seen phenomenal growth in the Ghanaian banking sector. Assets and Liabilities As competitors have led to an upswing in the volume of assets generated by the banking sector, so has the need to increase liabilities arisen. As at the end of 2009, the total assets of banks and NBFIs went up by approximately GH¢4 billion; representing a 33% growth on 2008 to GH¢15,604.6 million. The growth in total assets reflected in investments (GH¢1,835.9 million), cash and bank balances (GH¢823.5 million) and net loans and advances (GH¢752.8 million). The growth in assets was funded primarily by deposits, which increased by roughly GH¢2.5 billion in 2009. DMBs’ total assets increased by GH¢3,351.1 million or 31.3 per cent to GH¢14,043.3 million, which represented 89.9 per cent of the total assets of banks and NBFIs. Asset quality is an important issue for any bank and a sharp deterioration can lead to significant problems for a bank. In fact, a sharp-enough deterioration, especially over a short period of time, can lead to the insolvency of a bank, as witnessed in the case of several Western banks during the 2008 global financial crisis from which the international banking system is yet to recover. According to a recent survey report 3, the quality of banks’ loans and advances in Ghana deteriorated in 2009, with the industry’s average impairment charge to gross loans almost doubling from 2.2% in 2008 to 4.2% in 2009. Similarly, the cumulative impairment allowance to the gross loans worsened from 5.2% in 2008 to 8.2% in 2009. As witnessed elsewhere in Africa, increased cost of funds, inflation, depreciation of the Cedi and the delay by government in paying contractors and other service providers (as witnessed in Nigeria as well) were the key factors cited by
Financial inclusion is mostly ably achieved by an extensive branch network of commercial banks thereby facilitating easy access to banking services for poorer members of society and for those who live in rural areas. At the moment, there are over 700 branches of DMBs across Ghana and approximately 450 “agencies” of RCBs. With financial inclusion in mind, 700 branches for a population of approximately 24 million people are clearly insufficient, since on average it means that there is one branch to over 34,000 people. It is also important that branch networks are well spread out to meet the needs of the population as a whole and not simply concentrated in the main cities of Accra and Kumasi. While having an extensive branch network should be in the interest of the population, the government and the BoG, it is also advantageous to the interests of the banks themselves. An extensive branch network will help to build a much larger base from which to access deposits which are after all the lifeblood of deposit money banks. It will also create a huge potential market to which new banking products can be marketed. Further, if banks decide to diversify by expanding into, say, the insurance sector, a large branch network will provide an established setup through which to sell insurance products. However, it must be borne in mind that branches can be capital intensive given the need to fund resources such as property, IT systems and personnel and therefore it is important for banks to properly plan the pace at which they expand their branch network.
Capital The minimum capital requirement for Ghanaian banks is 10%, which compares
General banking licence allows both Class I and Class II banking business in and from within Ghana. Only Barclays Bank has a general banking licence in Ghana.
Report titled “Ghana Banking Survey 2010” jointly published by PricewaterhouseCoopers (PwC) and the Ghana Association of Bankers (GAB).
I banking licence allows the holder to transact domestic banking business - currently classified as Universal Banking Licence. Class II banking licence allows the holder to conduct banking business or investment banking business with non-residents and other Class II bank licence holders in currencies other than the Ghanaian currency except to the extent permitted by the Bank of Ghana for trading on the foreign exchange market of Ghana and investment in money market instruments.
– april 2011
favourably with the Basel ratio of 8%. In 2009, two banks (out of 26) failed to meet the 10% ratio. In 2009, the industry average capital adequacy ratio increased from 13.8% to 18.2%, mainly as a result of the ongoing recapitalisation of banks. Given this relatively high capital adequacy ratio, Ghanaian banks should be well placed to meet the newly-agreed Basel 3 capital adequacy package. However, as banks expand their group structures by establishing subsidiaries, they will need to give due consideration to the deduction requirements (i.e. a bank must deduct its investment in other financial institutions) of Basel 3 which are more stringent than those under Basel 2.
Liquidity In terms of Liquidity, banks are subject to a primary reserve requirement of 9.0% The Ghanaian banking sector is still in a state of evolution, as evidenced for instance by the significant adjustments in asset portfolio of Ghanaian banks which has taken place. For example, in 2009, most banks shifted their focus from loans to government securities. The industry’s ratio of liquid assets to total deposits increased from 0.53 in 2008 to 0.68 in 2009 4. The ratio of liquid assets to total assets, and liquid assets to total interest bearing liabilities for the industry also moved upwards in 2009 when compared with 2008. At least half of the banks in Ghana held funds in excess of the industry’s average liquid assets to total assets ratio of 0.48. Similarly, the industry ratio of liquid funds to total interest bearing assets increased from 0.48 in 2008 to 0.60 in 2009 5.
Profitability Notwithstanding the consistent increase in deposits and assets, profitability has suffered in the Ghanaian banking sector in the past few years. The table 6 below sets out the performance of the banking sector between 2006 and 2009 using six profitability indicators.
Impact of banking sector on the economy Available data for 2009 show that DMBs’ outstanding credit to public and private institutions stood at GH¢6,928.6million, indicating an increase of 16.1% year-on-year. This may be compared with an increase of 43.9% in 2008. 4 5 6
Return on Assets (ROA)
Return on Earning Assets (ROEA)
Cost to Income (CIR)
Net Interest Margin (NIM)
Return on Equity (ROE) Net Interest Spread (NIS)
In real terms, the annual growth rate dropped from 21.8% in 2008 to 0.1% cent in 2009. The annual growth rate of outstanding credit to the private sector declined from 48.2% (GH¢1,588.7 million) in 2008 to 15.8% (GH¢769.6 million) in 2009. In real terms, the annual growth rate declined from 25.5% in 2008 to -0.2% in 2009. With the exception of the Services, Commerce & Finance and Mining & Quarrying sectors, all the other sectors registered increases in the allocation of credit flow in 2009 compared with 2008. In respect of key sectors of the economy, credit provision to the Electricity, Gas and Water sector increased from 3.2% in 2008 to 14.5% in 2009; while provision of credit to the Construction sector also firmed up to 18.3 per cent in 2009, from 4.7 per cent in 2008. On the other hand, credit flow to the Commerce & Finance sector dropped from 19.2 per cent in
2008 to 1.1 per cent in 2009 and the Services sector from 35.9 per cent in 2008 to -0.9 per cent in 2009. The two sectors, Commerce & Finance and Services, which contributed significantly to the credit boom period from 2005 to 2007 accounted for the large declines in credit allocation in the recent past. The nonperforming loan (NPL) levels in all sectors have increased gradually since 2007, affecting banks’ willingness to increase credit to some sectors. Small and Medium-sized Enterprises (SMEs) and households are feeling the brunt of the banks’ reluctance to lend. This was confirmed by the governor of the BOG who claimed, from a survey conducted by the bank in June 2010 that, banks have made it increasingly difficult for these customers by raising the loan to value ratio of margin lending products as well as the type and value of collateral required.
Report titled “Ghana Banking Survey 2010” jointly published by PricewaterhouseCoopers (PwC) and the Ghana Association of Bankers (GAB), at page 44. Ibid, at page 45. Sourced from Bank of Ghana’s 2009 Annual Report.
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CHART: GHANA EQUITY MARKET CAPITALIZATION (Cedi, BN)
Capital Markets Stock market The Stock Exchange Act was passed in 1971 which provided for the creation of a stock exchange – the Ghana Stock Exchange (GSE). However, it was not until 1990 that trading commenced on the floor of the GSE. The GSE has certainly come a long way since its inception. Recently, on 17th September 2010, the GSE was named the “Most Innovative African Stock Exchange for 2010” at the Africa investor annual Index Series Awards. Although the Ghana Stock Exchange (GSE) has been a source of financing for corporations, it remains relatively small and illiquid. Trading is discontinuous, the total value traded is less than 1% of GDP, and turnover is below 4%. Now that the regulatory reform of the GSE has been completed, the Ghanaian government’s priority is to expand the investor base through public education and fiscal incentives for mutual and private pension funds.
Source: Bloomberg and Applied Capital Market (ACM) Ltd
investors (mainly banks) who hold till maturity (that is ‘buy-and-hold strategy). Therefore, it is important for the Ghanaian policymakers to develop policies that help to broaden the local private investor base.
More recently, in the money markets, there have been significant declines in interest rates on short-term government securities. However, these declines were expected to slow down considerably by the end of 2010 due the fact that the year-on-year inflation rate is believed to have hit its trough at about 9.4 percent per annum 7.
The stability of Ghana’ macroeconomic situation, over the past half-decade, has enabled it to achieve considerable success in developing its financial sector. There are now many potential investment opportunities on the GSE as companies start to patronize it in greater numbers, spurred partly by the new oil find. In addition, trading on the GSE, particularly by foreign investors, is aided by the fact that real time data is now available from Thompson-Reuters and Bloomberg.
Bond Market The introduction, in 2006, of partial capital account liberalization (via the Foreign Exchange Act) was a significant development in the advancement of the Ghanaian financial market. It had the effect of opening up the longer duration end of the market to foreign investors and has helped accelerate the development of Ghana’s domestic capital markets, in particular the bond markets. Nonetheless, the bond market is dominated by government debt (with only two corporate bonds listed on GSE). The secondary market in government bonds remains illiquid since most of these bonds are held by institutional 7
Money Markets Historically, aside from foreign exchange, the money markets have tended to dominate the financial markets in Ghana. This was due largely to the volatility and lack of development of the capital markets. Further, interests paid on government securities issued in the money markets have traditionally been higher than those paid on corporate securities such as corporate bonds. The main cedi-denominated money markets instruments are the short and medium term Ghanaian government debt instruments (91 day Treasury Bill, the 182 Treasury Bill and the one year Treasury Note) issued weekly via banks, brokers and discount houses. The 91day government bill has often been the benchmark for pricing other issuance. There is also some commercial papers issuance by corporate via the discount houses. Added to these are the 30 Days REPO, call money and the inter- bank markets. The key participants in this segment of the financial market are the BoG, brokers, discount houses, corporates, banks and other financial institutions.
“The Economy of Ghana 2010: Mid-Term Report”, Centre for Policy Analysis (CEPA), Ghana, at page 12.
– april 2011
The stability of Ghana’s macroeconomic situation, over the past half-decade, has enabled it to achieve considerable success in developing its financial sector. The development has been driven by financial sector liberalization policies, enhanced competition as a result of new entrants (including, in particular, foreign institutions) and gradual capital account liberalization. Notwithstanding these successes, there are still improvements required. These include for example: • Significant expansion of the equity markets • Deepening of the secondary capital markets (for enhanced liquidity, confidence and access to capital) • Reform of the provision of finance to small and medium-sized enterprises • Improvements in microfinance/rural banking (to improve access to financial services) • Increased participation of the private sector in the pension and insurance sectors • Increased bank branch network • Full implementation of Risk-Based Supervision For bespoke solutions, training and consultancy services relating to financial markets, please contact Applied Capital Market Ltd (ACM), at firstname.lastname@example.org
focus on ghana
ACM INSIGHT acm-insight!
– april 2011
The State of
Ghana’s Economy There is a golden chance for Ghana to put itself on the global map in the foreseeable future. As a relatively nascent market, it has the entire recipe for success provided it consolidates all at its disposal and approaches this next step of crucial economic development amongst others, with an enterprise framework.
here is a golden chance for Ghana to put itself on the global map in the foreseeable future. As a relatively nascent market, it has the entire recipe for success provided it consolidates all at its disposal and approaches this next step of crucial economic development amongst others, with an enterprise framework. Such holistic framework will identify all probable risks (including economic risk, political risk, strategic policy making risk, foreign debt risk, current account balance (financing) risk and sovereign risk etc) that could maximise the source of threats and reduce the chances to capitalise on opportunities. With the discovery of oil and influx of foreign investors, there needs to be some meaningful, yet sustainable controls in place to ensure
In achieving this aim, Ghana is expected to strengthen and improve on its core areas of business including improvements in agriculture (a sector that employs 60% of the workforce and accounts for 37 % of GDP), revamp of its infrastructures through infrastructure development programs, expansion of oil and gas projects, attracting private sector initiatives through tax relief and public private partnership (PPP) development programs, embracement of information and communications technology schemes and essentially reducing poverty to the utmost minimum. The global financial crisis that emanated in the US impacted on all economies directly and indirectly and as a result, Ghana has had its own fair share of the resultant decline.
... Ghana is expected to strengthen its core areas of business in 2011 ... that risk exposure levels are gradually monitored and controlled to ensure sustainable economic growth. In this edition of ACM-Insight!, we aim to provide an insight into the Ghanaian economy as a whole including its current budget and forecast, macroeconomic indicators, impact of the global financial crisis, immediate and future plans, investments, untapped investment potential and infrastructure funding etc.
Its huge fiscal deficit in 2009 further compounded this misery and led the President John Atta Mills to put macroeconomic stability and improving fiscal governance at the top of his policy agenda, and aimed for medium-term fiscal deficit target of 2.1% in 2011 and 1.6% in 2012 9.
As a result, it turned to the International Monetary Fund (IMF)/World bank for financial support due to the fiscal gap 10, leading the World Bank to approve loans to the tune of US$535 million in 2009 to support three credit facilities 11, as part of US$1.2 billion the World Bank plans to support the government of Ghana with over the next three years, to address Ghana’s fiscal gap.
Ghana’s fiscal policy for 2011 is aimed at sustaining macroeconomic activities, to build further upon the achievements in 2010.8
However, the potential oil revenue is anticipated to aid deficit reduction and enhance economic growth from 2011 and beyond.
Economy / Budget 2010 and beyond
Speech For the 2011 Fiscal year by Minister of Finance: Budget Statement and Economic Policy of Govt of Ghana”
focus on ghana
This view can be attributed to some macro-economic factors not limited to the BoG’s tightening of monetary and fiscal policies, rise in investments especially via the private sectors including Manufacturing and Agriculture, and not least the mining of the new found oil due to start in earnest - this should move Ghana from a low-income country into the oil exporting and middle-income African economy. These factors are the bedrock of attracting foreign direct investments (FDI) into the country along with the potential of obtaining competitive risk-adjusted rates of return on investments. Inevitably, robust oversight should help towards reduction of its external and internal debts and contribute to job and wealth creation for its people. According to Ms Veronica Kalema, a director at Fitch sovereign group, Ghana’s ability to settle its debts as well as the use of balance of payment support from the IMF/World Bank have contributed to its justification for B+ status 13 .
Figure 2: Imports and Exports
Data source: Trading Economics
The graph below depicts some of the fundamental indicators that explain the outlook of the Ghanaian economy. One of the country’s main objectives is to reduce its external debt. Further, the success in doing so should correspond to self sustainability of its economy and less dependent on foreign credit lines. As mentioned earlier, there are quite a few positive factors for Ghana to look forward to not least the new-found oil, the prospect of increase in export of goods and services and more than a decade of political stability. The forecast figures suggest just this.
Figure 1: Budget balance, Current account and CPI inflation According to rating agencies Fitch and Standard Poor’s, Ghana’s economic position is reasonably stable hence rated B+ and B respectively 12. 9
Figure 3: Macroeconomic indicators
See “Ghana” , Lloyds Banking Group Dr. Kwabena Duffuor - Budget Statement and Economic Policy 11 These are: Economic Governance and Poverty Reduction Credit (EGPRC) – ($300m); Transport Sector Project - ($225m); and Natural Resources and Environmental Governance Credit - ($10m) 12 In August 2010, Standard & Poor’s undergraded Ghana’s credit ratings from B+ to B, as result lack of clarity in the country’s oil sector, as well as the large fiscal deficit. But this was challenged by most analysts, even the IMF. 13 Fitch Rating Agency - (Ghana’s Economic Outlook Stable) 10
– april 2011
Impact of the global crisis and future recovery forecast As a result of the global financial crisis of 2008, the Ghanaian economy suffered a sharp decline in 2009. This somewhat delayed impact was partly due to the contagion effect of the global economic crisis but, even more so, due to the increase in economic policy activities that came about in the run up to the general elections. The surge in economic growth in 2008 had been as a direct impact of (but not limited to) the following: • Increased revenue from agriculture; • Surge in private sector activities; and • Credit expansion by banks and financial institutions. This upward and forward movement in the economy led to increased domestic demand. This, in addition to global fuel and food prices increased inflation rate to 18.1% year-on-year at end of 2008, while the current account and fiscal deficits expanded to 21.3% and 14.5% of GDP respectively.
The forecast for Ghana from 2010 to 2011 suggests a high degree of growth... The graph below shows the relationship in 2008/9 between Ghana and the rest of Sub-Sahara Africa in respect of real GDP growth. However, the forecast for Ghana from 2010 to 2011 suggests a high degree of growth, as a result of the new found oil, continued upswing in the private sector, surge of foreign investment and robust fiscal governance. These should stabilise and equally help to grow the economy.
• Controlled (lower inflation rate) and strong cedi; • Sustainable fiscal policy that ensures a diversified economy; • Growth - independent assessment of its varied economic variables and comparison with the global economy; • Efficient monitoring and management of both external and internal debts; • Risk Management - hedging of its future income stream from oil export to guard against potential fall in future prices; • Rapid development of its financial and capital markets – e.g. corporate bond market; • Maintenance of private sector profitability; • Appropriate but attractive taxation of corporate activity etc.
Investment in Agriculture Since the Agricultural Sector employs 60% of the workforce and accounts for 37% of GDP, it is an area that requires continuing investment to sustain growth and improve profitability. In mid-September 2010, the Ghana Cocoa Board signed a $1.5 billion credit agreement with 18 banks, which have entrusted their funds in the country’s cocoa promoter to purchase cocoa for the 2010/2011 crop season. Initially sourcing for US$1.2 billion, Ghana Cocoa Board has increased the threshold to $1.5 billion as the transaction was oversubscribed at $1.834 billion at a lower interest rate than what was paid last year .14 Other major export products (including gold, timber, bauxite, manganese and electricity) require adequate investments and should be given due consideration in order to avoid over-reliance on the new found oil.
Figure 4: Real GDP Growth It is essential to balance fundamental principles against forecasts. Perhaps the question on the minds of the government of the country is the likely impact the economic policy-making strategies (and their performance) might have on the prosperity of the economy in future years. Applied Capital Market Ltd (ACM), experts in African financial markets, strongly believe that in continuing to move the economy forward, and in order not to fall short of the forecasts, the Ghanaian government should develop appropriate policies to ensure or encourage the following: • C onsistent, robust and transparent central bank policy-making (including monetary policy);
focus on ghana
Ease of new business establishment The ease with which new businesses can enter and establish comfortably in Ghana is paramount not only to attract foreign investors and grow the economy but also job and wealth creation. Further, some prudent measures must be put in place in order to improve the attractiveness of Ghana as an investment destination. Some of these measures are: • Embracing Information Technology; • Provision of lines of credit by banks and other financial institutions to corporates, SMEs and individuals • Offering of more sophisticated financial products; • Tax reliefs; • Competitive market environments; • Free trade zones; • Zero tolerance on corruption; • Transparency
Infrastructure funding Poor or inadequate infrastructure hinders any development programs hence the need to invest. There are different ways of funding such projects including loans, monetisation (trade by barter), PPP, use of future revenue receipts (structured financial products that could be linked with future oil receipts e.g. securitization), government funding, private funding etc. 15 16
Ghana Business News (GBN) Dr. Kwabena Duffuor - Budget Statement and Economic Policy
– april 2011
Perhaps the most important means of funding infrastructure projects (for an emerging economy) such as transport and construction of homes etc is through public private partnership programs. Therefore, Ghana needs to intensify the utilization of this form of funding. Just recently, Ghana signed a $10.4 billion concessionary loan for the development of a railway system from Kumasi to Paga, Ghana’s Eastern Corridor roads network and other sectors of the economy.15 Of this, $4 billion would go into the railways system, $6 billion for ancillary energy infrastructure, education and sanitation amongst others, and $400 million for the Eastern Corridor roads. The execution of the roads and railways project is expected to open up the eastern, middle and the northern parts of Ghana for accelerated development.
the Upper West, Upper East and Northern Regions towards poverty reduction. This move also reaffirms the government’s zeal to fulfil its intentions as stated in the 2010 Budget speech to expand and complete key infrastructure in the country including power, transport, and information and communications.16
Immediate and Future plans There is a risk that, in spite of all the programs being put in place for the development of the Ghanaian economy, non-corporate citizens may not necessarily be able to adequately contribute to, or gain from, this process. The future of Ghana lies in the hands of all its citizens (educated and un–educated alike, corporate and non-corporate etc) and its development fundamentally lies in internallydriven policies as well as internal and foreign investments.
Africa’s profitability is one of the best kept secrets in today’s world economy”. Statement by the former UN Secretary-General, Kofi Annan, in 1999. This initiative also seeks to promote the exploitation of mineral deposits and the execution of the Savanna Accelerated Development Project meant to open up
In September 2009, the Ghanaian president launched a new national pension scheme that would provide retirement security for the “informal” sectors. Not only will this stimulate
the capital market and maintain sense of ownership, the contribution to this scheme will also serve as collateral for home mortgaging hence encouraging home ownership as well as developing the mortgage market. It is anticipated that this scheme will be fully operational by 2011. This move has to be carefully managed as there are quite a few inherent risks (including but not limited to fund custodian/investment risk and regulatory risk) that come with such developments. The future looks vibrant for Ghana and given the above, it is forecasted that the GDP will continue to grow robustly and that foreign investments will also continue to come into the economy. The risk is that it may not be fully ready to cope with the rate of influx of these investments. An advantage for Ghana, however, is the opportunity to learn from the mistakes of its neighbours by ensuring the following: • P eriodic review of its trading and foreign business ownership laws. • Independent and robust analysis of foreign investment system – it should dictate the terms and not be dictated to. • Continue to build and maintain an attractive investment platform for investors.
Ghana’s untapped investment potential “Africa’s profitability is one of the best kept secrets in today’s world economy” was a statement made by the then UN SecretaryGeneral, Kofi Annan, in 1999 .17 This is undoubtedly true given the huge profits that foreign and domestic companies (e.g. telecommunications) are reaping in many African countries such as Angola and Nigeria. However, this is only achievable and sustainable if Ghana continues to maintain a sustainable balance between local and foreign investors for the sake of persistent economic development”. The Ghana Investment Promotion Centre (GIPC), the office responsible for encouraging, promoting and facilitating investments in all sectors of the economy except mining and petroleum, has been working to improve knowledge, build relationships and implement strategies in the economy amongst domestic and foreign investors in terms of providing relevant and prompt information, agreed corporate tax and custom duty exemptions, developed investment frameworks for investors etc for sustainable economic development. Given the growth in the regulated sectors of the economy such as the banking and finance sector, there is the need to equally develop the nonregulated trade and commerce sectors such as self-employed traders.
The general consensus is that this category of people does not contribute enough to the national income.
Conclusion The indirect contagion effect of the global economic crisis on African economies as a whole was the immediate withdrawal of funds which led to significant loss of value in a number of the African equity markets. Ghanaians do not invest in the stock market enough and as such need to and own more in the exchange than foreigners in order to deal with such contagion effect. The regulator of the market, Ghana’s Securities and Exchange Commission, should seek to educate the general population in order to stimulate the capital markets. Equally, Ghanaians in the Diasporas should be encouraged to bring back their expertise to the development of the economy in terms of being involved in manufacturing, agriculture, real estate, construction and architecture and so on. In ensuring growth and stability in the mid- to long- term, the government of Ghana must continue to review its comprehensive set of policies and initiatives thereby continuing to progress its varied development programs for the sustainment of a better, more prosperous Ghana. For bespoke solutions, training and consultancyservices, please contact Applied Capital Market Ltd (ACM), at email@example.com.
At the annual summit meeting of the Organization of African Unity (OAU) in Algeria on 12 July 2009 (http://www.un.org/ecosocdev/geninfo/afrec/subjindx/132inves.htm)
focus on ghana
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ACM INSIGHT acm-insight!
– april 2011
Eureka! Oil in Ghana If oil revenues are efficiently administered, these could transform the Ghanaian economy, potentially doubling the state’s revenues, and creating more jobs and helping to stimulate much-needed industrialization. Otherwise, doubter points to Nigeria’s experience, where hundreds of billions of oil revenues have created great wealth for a few, promoted corruption and exacerbated poverty for many.
ureka!!! Oil has been discovered in Ghana, in commercial quantities and, as a result, the Ghanaian economy appears set to shift from one based on cocoa and gold to an oil-based economy. Whilst on the one hand, Ghana‘s oil reserves are relatively modest compared to major oil producers (such as Nigeria, Angola etc), and will hence not radically transform Ghana‘s economy into one where oil becomes the major sector in the short term; on the other hand, they are already large enough to deeply affect the future of the non-oil economy (such as agriculture and mining), either positively or negatively.
In order to avoid any negative oil impact, stakeholders have stimulated policy debate to ensure optimal utilization (and perhaps distribution) of oil revenues. In other words, concerns have been raised about ensuring an effective management of oil wealth to achieve development outcomes and maintain Ghana’s diversified revenue structures and avoiding generally oil discovery syndrome (such as Dutch Disease syndrome 18). In this edition of ACM-Insight!, we explore the key issues, opportunities and challenges facing the recent oil discovery in Ghana and how they can be effectively managed to support (and not hinder), sustainable fiscal and economic growth.
In the shorter term, oil revenue could help Ghana address its large fiscal imbalance ... In the shorter term, oil revenue as it comes on board in 2011 could also help Ghana address its large fiscal and external imbalances, and cushion the negative impact of the recent global economic meltdown. Ghana remains one of the fastest growing economies in Sub-Sahara Africa gifted with an assortment of natural resources and sustainable democratic political structures. The IMF projected Ghana’s economy to expand by 4% to 5% in 2010, boosted by investments linked to the offshore oil sector and, also, analysts’ general consensus have projected that economic growth will average between 9.5% and 10.5% over the next five years as revenue from oil production starts to flow to the government.
Overview of Ghana’s Oil Discovery Ghana is now viewed as the new hot spot of the significant oil and gas industry in Sub-Sahara Africa. Note that Ghana also has substantial deposits of gold, which has historically been its major export. While Ghana is blessed with abundant natural resources, the country has retained an importance for the agro-economy and, as a result, the economy depends on commodities exports (Africa’s second largest producer of gold and world’s second-largest producer of cocoa, after Ivory Coast). Oil prospecting in Ghana started in 1898, with no significant discovery until 1970 in shallow waters off the coast of Ghana.
utch Disease is a concept that tries to explain the apparent relationship between the increase in exploitation of natural resources and a D decline in the manufacturing sector.
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Until now, oil and gas contributed only 0.3% of the gross domestic product (GDP) and Ghana has only been able to produce a maximum of 9,000 barrels per day. Moreover, Ghana’s reserves were estimated at only 15 million barrels of crude oil and 800 billion cubic feet of natural gas (133 million barrels). The discovery of the Jubilee oil field (off the Ghanaian coast) in 2007 caused the then-President John Kufuor to declare that Ghana had oil reserves of 3 billion barrels and called his country’s future “very bright indeed”. However, the discovery of the Jubilee field could soon put an end to the supremacy of cocoa as the major source of revenue. The Jubilee field contains estimated reserves of up to 1.8 billion barrels of oil, and it is expected to be producing 120,000 barrels per day by 2011. But this is only part of the picture: not far from Jubilee, the Tweneboa field has also been discovered, with an estimated potential of up to 1.4 billion barrels. More reports of discoveries could well follow since because most of the drilling licenses were only awarded in the last few years and many of the drilling campaigns are only just starting. It is estimated that Ghana’s oil and gas reserves stands at about 5 billion barrels, which would take the country into Africa’s top league. Of course, this still leaves Ghana far behind Nigeria, the African frontrunner and a major global player, but the benefit of Ghana’s reserves is that they can be flourished under more stable political conditions (when compared with the more volatile political setup in Nigeria) with an attractive tax framework. Having briefly explored the potential benefits that oil discovery can have for Ghana’s public resources, we shall now turn to the risks inherent in such a development highlighting the pitfalls that Ghana must avoid in order to achieve its potential. We think it is more useful for our readers (such as financiers, oil marketers, insurers and policymakers) if we concentrate more on identifying the pitfalls so that these can be effectively managed or avoided.
Risks in Oil Discovery Exploration of newly-discovered oil can provide substantial resources to the Ghanaian government and to the various actors of production employed in the other sectors of the economy. Nevertheless, just how these oil resources are spent can create substantial macroeconomic turmoil, such as the Dutch Disease whereby existing successful sectors (such as mining and agriculture) are under-utilized resulting in a loss of sustainable growth and international competitiveness. Also present is the risk of over-dependence on oil revenue, corruption, political risk, socio-economic and environmental risks.
Dutch Disease Dutch Disease risk exists with oil given its exhaustible nature and the possibility that it induces an untenable pattern of specialization. Its effects also include induced changes in the exchange rate, the real exchange rate (the relative prices of non-tradable and tradable goods) and the nominal exchange rate. The resultant effect could also be as a result of rise in the price of non-tradable goods and services, as demand for them increases with oil windfall revenue with limited supply response, and its consequence in terms of lost exports competitiveness. In the 1960s, the Netherlands experienced a vast increase in its wealth after discovering large natural gas deposits in the North Sea. Suddenly, this superficially positive progress had serious effects on vital sections of the country’s economy as the then Dutch currency, the guilder, became stronger, making Dutch non-oil exports less competitive.19 That is, the economy was inevitably intoxicated with a strong currency making imports cheaper as a result of which local industries became less and less competitive as their products could no longer compete with imports. This syndrome has come to be known as “Dutch Disease” or “Resource Curse”. Even though this disease is generally associated with a natural resource discovery, it can occur from any development that results in a sudden large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment. Economists have used the Dutch disease model to examine such episodes, including the impact of the flow of American treasuries into sixteenthcentury Spain and gold discoveries in Australia in the 1850s. 20 A decade after the Netherlands’ experience, the process repeated itself in Nigeria, when oil began to flow and the naira effectively became a “petro currency” during the second oil shock of 1973-80. The country earned $32 billion between 1973 and 1978, and $16 billion in 1979 alone. In 1980, the country grossed $24 billion. The naira was consequently one of the world’s strongest currencies, exchanging at 80 kobo to $1. It was, for instance, cheaper to import goods than produce it locally due to favourable exchange rate. Consequently, local industries and other sources of revenue (such as agriculture especially cocoa, groundnut, cotton and palm oil) suffered significantly. 21 At present, Ghana is exposed to rising non-tradable sectors, which comprise the public sector, construction, finance, and extractive industries. In past decades, traditional exports, such as gold, cocoa and timber, have dominated the “non-traditional exports”, which grew insignificantly compared to traditional exports. This coupled with expected oil revenue suggest a risk of real exchange rate appreciation directly as demand pressures rise, or indirectly through anticipations and related speculative bubbles.
On the one hand, it is clear that if oil revenues are efficiently administered, these could transform the Ghanaian economy, potentially doubling the state’s revenues, creating more jobs and stimulating much-needed industrialization. But, on the other hand, many predictably point to Has Ghana witnessed the start of the Dutch disease? Nigeria’s experience, where hundreds of billions of dollars in oil revenues The cedi appreciated against key currencies, in the first three quarters of have created great wealth to a few, promoted corruption and exacerbated 2010, with similar trends in the fourth quarter, as s result of an expected poverty for many. Below, we shall look at the many risks posed to Ghana “petrol currency”. This may become risky for economy growth if not efficiently managed. simply as a result of oil discovery.
19 20 21
“Finance & Development”, March 2003 (Dutch Disease) “Finance & Development”, Ebrahim-Zadeh, Christine March 1, 2003 “Nigeria and Other Oil-producing Countries: A Comparative Study”, ThisDay Oil Report
– april 2011
To avoid the creeping effect of the Dutch disease due to foreign exchange risk, Ghana should embark on effective risk management of its exchange rate to gain the benefits of oil discovery to enhance the country’s growth prospects.
Corruption Resource rich countries have tended to experience a slower pace of economic development caused by factors such as weak fiscal transparency, bad budget practices, and mismanagement in the midst of apparent plenty. Transparency International (an anti-corruption campaign group) found that oil wealth is often a breeding ground for corruption and billions of dollars are lost to bribery in public purchasing, citing the oil sector in many nations as a particular problem. The worry for market observers is that Ghana could potentially follow the path of Nigeria where the receipts from the oil boom of the past decades have been looted leaving most of its citizen in abject poverty, rather than being used to develop the country and build a sustainable future. In Nigeria, at least, oil created a corrupt political system obsessed with greed and looting.
Ghana’s policymakers should... effectively de-link oil resource revenues from government fiscal performance. In Ghana, there are already allegations of corruption whirling around companies involved with the Jubilee oil field. For example, the The US Justice Department carried out a corruption probe into oil-and-gas explorer Kosmos Energy LLC (although the probe ended without any charges being filed) after the company was reported by a partner for possible bribery in relation to the development of the oil field. Reinforcing transparency in managing oil revenue is critical to mitigating asymmetries of power and information between the different stakeholders and promoting accountability in the oil sector. In March 2009, President Atta-Mills announced a full disclosure of all present and future oil contracts in an attempt to increase transparency in the sector. Also helpful are the adoption and implementation of the Freedom of Information Act; and the stipulation and enforcement of accountability mechanisms regarding the publication of reports on revenue and their use and the disclosure of bidder’s identity and bidding documents.22
Historical experience suggests that countries experiencing oil booms have often ignored agriculture leading to destruction of vibrant agricultural export sectors, escalating food imports, and growing inequality. Case studies exist from Nigeria, Ecuador, Mexico, Algeria, Iran and Iraq, where the oil boom of the 1970s and 1980s severely affected agriculture. Further, experience suggests that once market share is lost it can be extremely hard to regain due to the loss of commodity-specific capital (in term of processing plants, scientific knowledge and technical skills). Ghana should aspire for a strong, growing, and sustainable economy. A sustainable economy enhances a nation’s standard of living by creating wealth and jobs, encouraging the development of new knowledge and technology, and helping to ensure a stable political climate. The diversity of an economy (that is, one based on a wide range of profitable sectors, not just a few) has long been acknowledged as playing an important role in sustainability. In preventing the Ghanaian economy from exposure to oil price shocks, it is important to consider diversifying perhaps in two ways: acro-economic diversification (developing a competitive non-oil • M sector); and • Investment diversification (e.g. by setting up a Sovereign Wealth Fund). Given the structure of the macroeconomic diversification, and that it manifests against the advantages of specialisation, it can take a long time to implement as well as feel the impact. However, investment diversification is faster and easier to implement as the preferred route of self-insurance. Investing money abroad also limits real exchange rate appreciation. 24 The aim of Ghana’s policymakers should perhaps be to effectively de-link oil resource revenues from government fiscal performance. This can be achieved via the establishment of funds with the oil resources as well as prudence in managing the country’s macro-economy.
Political / Socio-economic risk It is well-established that there is linkage between oil resource and political/socio-economic risk, such as creating and sustaining conflicts and political instability. Oil is essentially an economic resource. It has little value to the traditional peoples of the region in terms of their survival, representing economic wealth only to the extent that it can be found, extracted from the ground, processed and shipped to industrial centres for use. The following are some the resultant developments observed in other countries:
• F irst, discovery of oil leads to an attempt by the government to appropriate oil-bearing lands. • Second, efforts to appropriate land from groups without giving them a voice in the decision-making process and without what they perceive to be equitable compensation leads to rising social tensions Over-dependence on Oil Revenues and outbreaks of rebellion.25 Ideally, Ghana’s new-found wealth in the so-called black gold should, in • Third, the negative environmental consequence of oil production principle, be of benefit to the country’s economy. The production of oil usually diminishes the traditional sources of livelihoods. generates gains that exceed the normal return on invested capital and • Fourth, oil revenues can be used to finance the government’s military economic rent. But oil is also associated with challenges, such as overaction and purchase of advanced weaponry, intensifying the military dependence on oil and the neglect of other sectors of the economy. campaign against the inhabitants of the oil-bearing regions.
The inclusion of the oil sector as part of Ghana’s Extractive Industries Transparency Initiative (GEITI) 23 programme would significantly enhance the governance and use of oil revenues for development.
22 23 24 25
“Can Ghana avoid the oil curse?”, Andrés Mejía Acosta and Antoine Heuty, May 2009 This requires companies to publish all payments to the government and the government to publish all payments received from extractive companies. “Macroeconomic Risk Management for Oil Stabilization Funds in GCC Countries”, September 2009 In Ghana, the emergence of a group called the Cape Militia has created some tension about the discovery of oil. The militant group is apparently posing as a mouthpiece for mostly unemployed youth of oil producing areas, and they are agitating for a large share of the oil revenues and first priority in development.
focus on ghana
• F inally, rebels may focus their campaigns on oil production and transport facilities which are seen as strategic targets due to their central importance to the government and to the companies upon which the government depends for revenues. From a political economy perspective, the prospect of new oil discoveries in Ghana appears to have motivated a competition between national and regional governments for sharing the expected windfall revenues from oil exports. Although, Ghana is a young democracy, with no dominant single political party yet, political parties are nevertheless well institutionalized. In addition, traditional leaders provide some restraint on the capacity of the Executive to pursue their own self-interest and extra-institutional interventions from the military. However, Ghana does indeed exhibit the political characteristics of a “factional democracy” and perhaps even has some remnants of its recent past as an autocracy with political incentives that produce a high level of clientelism and patronage politics with government responding to narrow interest groups. The Ghanaian government should institutionalise sound policy-making processes and a robust legal framework for the oil sector and encourage public participation in decision making in respect of oil development and use of oil resources to provide an efficient and equitable distribution of the oil wealth across different sectors.
Environmental Risk Historically, large-scale oil production has always had a significant impact on the landscape and the local environment. Similarly, contamination of soil and water is also a common result of oil production, especially areas where environmental regulations are not really adhered to. Implementing a holistic and robust environmental regulatory framework at this infancy stage is the least expected of the Ghanaian government. This regulatory case is not being helped presently because of the delay in the government passing the new gas and oil exploration bill hence the cry from the civil society groups for suspension of licenses until the bill is passed into law. The oil fields are mostly surrounded by people who predominantly earn their livelihood from fishing business and in securing production of oil will only impact on the locals as area around platforms will be fenced off thus limiting and eventually killing the fishing business. As it were, the president, John Atta-Mills recognises this fact and has indicated that he is prepared to give it due consideration and attention. Groundwater is particularly susceptible to contamination from the ‘formation water’, extracted along with oil during drilling. This ‘formation water’ is contaminated both with oil and with heavy metals and is therefore toxic. Further impacts stem from the burn-off of excess natural gas, can have a devastating effect on water quality and biota. This burning releases methane, sulphur dioxide, and toxic compounds. The high temperatures can also exacerbate the risk of fires.26 The environmental consequences of oil production are another source of potential conflict between the government and the local oil communities. Environmental degradation can contribute to resource scarcity, and thus to the loss of traditional livelihoods for oil communities. 26 27 28
This has been the experience in Nigeria’s Niger Delta for many decades now. BP’s recent oil spill in the Gulf of Mexico is another reminder of the significant damage that oil exploitation can cause. Nigeria’s case has been one of gross neglect by oil majors such as Shell as well as lack of institutional protection by the Nigerian government whilst in BP’s case the company was forced to clean up and pay huge compensation by the United States government. Therefore, it is of utmost importance that the Ghanaian government puts in place institutional arrangements for identifying and remedying environmental damage as well as punishing oil companies that perpetrate them.
The experts at Applied Capital Market Ltd (ACM) believe that Ghana should:: • Adequately examine the potential environmental impacts.
• I nstitute basic principles of proper natural resources and environmental regulations prior to commencement of oil exploitation. • E nsure strict adherence, compliance and dependence of the oil and gas license on the fundamental environmental law and regulation.
• Create an ecology fund funded via an ecology oil exploration tax.
Conclusion There is always a risk (threat) that that Ghana may become prone the petrodollar syndrome as has long been the case in many other countries, it is important to note that there are instances where the discovery and exploration of oil and natural resources have indeed contributed to the development of an economy as in the case of Northern Alaska, USA, where oil discovery and exploration has benefited communities in the North Slopes through the provision of jobs, schools and medical facilities. Similarly, this was the case in Norway . In Botswana, the government ensured that the benefits of one of its main natural resources (i.e. diamonds), was being enjoyed by its citizens. The key to positive impact of oil in Ghana is the successful passage of the oil and gas exploration bill thus ensuring that it incorporates, as appropriate, rules and principles that the licensing process will be based upon. The continuous monitoring and managing of this framework is key to avoiding turning out to be like Nigeria as the temptation of the influx of what we call “free oil money” is indeed tempting to lose track of the strategic objectives of the bill. It is hoped that Ghana will learn lessons from other countries experiencing a sharp inflow of oil or other mineral revenues. Further, the expectation is that the Ghanaian policy makers will institute the appropriate policy and institutional frameworks to avoid the risks associated with oil discovery. This is further buttressed by the study carried out by Oxfam America and Ghana’s Integrated Social Development Centre that ‘the transparent management of oil funds not only improves public spending, but gives the public greater confidence that their money is being spent wisely’. For bespoke solutions, training and consultancy services relating to hedging strategies for managing oil receipts, please contact Applied Capital Market Ltd (ACM), at firstname.lastname@example.org
Oil and Violence in Sudan, Jason Switzer The Impact of Oil and Gas Discovery and Exploration on communities with emphasis on women - Akosua K. Darkwah (National Academy of Sciences (2003). In Norway, citizens receive substantial social services and the government invests oil rents in a permanent fund for the future.
– april 2011
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Corporate Bond Market Hullabaloo! Over the past few years, emphasis, in many African countries, has been on the development of local currency bond markets. The main driving force for this includes a desire to avoid the currency mismatch that is associated with domestic debt that is denominated in foreign currencies – which has been known to trigger, or worsen the severity of, financial crises. Another aim is to develop local capital markets so as to improve the flexibility and effectiveness with which financing is raised for local infrastructure and other projects of a medium- to long-term nature that could improve socio-economic development.
n Nigeria, the Federal Government has been issuing debt securities at increasing longer maturities over the past decade so as to lengthen the maturity profile of government securities issues in order to establish a benchmark yield curve for corporate bond issues. The idea here is to encourage companies and other entities in infrastructure sectors to issue bonds as a way of financing infrastructural development. But the corporate bond market has nevertheless remained largely underdeveloped and very small in terms of size and volume. However, some impetus to corporate bond issues has come from the effects of higher bank lending rates which followed the onset of the acute phase of the global financial crisis in the latter part of 2008.
Recently, the Nigerian government approved tax exemption on corporate bond issues and a reduction in stamp duty in order to stimulate the development of the corporate bond market. As a result of stimulating a more favourable environment, more corporate organisations are planning to issues bonds (including banks). This blind mass exodus from equity issues to bond issues by banks needs to be approached with caution, so that we do not end-up in another asset price bubble.
– april 2011
Applied Capital Market Ltd (ACM) believes that one of the main causes of the recent banking crisis, in Nigeria for instance, was inefficient allocation and utilization of capital raise via the equity markets, which was used, in significant proportions, for funding speculation in the equity and oil markets. The result was the creation of big, and ultimately unsustainable, asset bubbles. In the present challenging banking environment where the reform agenda is somewhat unclear at the moment (coupled with the proposed abolition of universal banking), we think that it may be very financial and economically risky for retailfocused banks to be issuing corporate bonds. So, ACM suggests that the Central Bank of Nigeria (CBN) should set a limit on banks’ gearing ratio so as to prevent an unsustainable growth of banks’ balance sheet size. The CBN, in collaboration with SEC, should constitute a committee to evaluate any proposed bond issues by banks. Please note that we are not saying that corporate bonds should not be issued by banks, only that it may be right for all banks and the timing may not be right for some banks. For banks that intend to participate in the funding of long term capital-intensive projects (such as infrastructure) or even to fund small businesses over, say, a 5 year duration, and to also at the same time properly manage their asset/liability mismatch, we believe that debt finance has an important part to play, and here bonds of suitable maturity profiles can and should play an essential role. For a more in depth analysis of corporate bonds, please see our publication ACMInsight! (http://acm-consult.com/articles/Corporate Bond Markets Now. pdf ). The experts at ACM agree that in order to stimulate corporate bond markets, there should be some incentives such as tax-exemptions but we do not agree with a blanket tax-exemption for all corporate bond issues. Instead, it should be targeted at real sectors (such as manufacturing, agriculture) and infrastructural development.
We believe that corporate bond issues by banks should be taxed and so should foreign investors in certain sectors (such as bank, telecommunication and oil & gas). This would create the right balance in the nascent corporate bond market so as to avoid the debt market being over-dominated by banks issues, and also to help stimulate investors to invest in the real sectors (and, so, increase liquidity). For sustainable development of the corporate bond market, banks’ major role should be to provide corporate finance advisory services, underwriting and market-making (trader to create liquidity) activities. Here, we mean “investment banks” (or investment banking divisions of universal banks), not pure “retail banks”. Also, the Securities and Exchange Commissions of countries across Africa need to better educate investors a lot more on bond fundamentals, create an efficient bond architecture (such as evaluating bond credit worthiness, database of company financials etc), set minimum standard templates for bond prospectuses (presently, the content of such prospectus lacks adequate information), and liaising with Debt Management Offices and central banks to create risk-free yield curves benchmarks. The experts at ACM believe that present returns on bonds do not adequately compensate for both credit and inflation risks which are inherent in it, so the CBN should endeavour to ensure that inflation is well managed. In conclusion, ACM would like to make clear that we support a rapid deepening of the corporate bond market but merely highlight the need for potential issuers to seek appropriate professional advice because bonds are not suitable for all borrowers or for all circumstances. For any further discussion or questions, please email: firstname.lastname@example.org.
Success in these terrain demands more than business as you know it. At Africonomie, we combine experience and deep local knowledge to help our corporate and institutional clients. We are your gateway into the new frontier-Nigeria. our clients say; we are their preferred partner when it comes to business in Nigeria.
– april 2011
CBN’s Review of the Universal
Banking Model – ACM’s Response
In the first quarter of 2010, the Central Bank of Nigeria (CBN) reviewed the Universal Banking Model used by banks in Nigeria. The CBN, which initially introduced universal banking in 2000, now believed that the regime had exposed banking business to greater risks that challenge the stability of the financial system. The stated aims of the then proposed changes were to “enhance the quality of banks, ensure financial system stability and promote the evolution of a healthy financial sector”.
pplied Capital Market Ltd (ACM) decided to contribute to the consultation process by providing comments to assist in the CBN’s policy development process in this area. Our comments, which we sent to the CBN in April 2010 (and which we also published in Proshare), are reproduced below.
We set out under three headings below, namely: • Abolition of the Universal Banking Model
• Classification of Commercial Banking Activities • The HoldCo-based Universal Banking Model
Abolition of the Universal Banking Model The CBN’s Proposal
The universal banking regime was introduced by the CBN in 2000 (under the “Guidelines for the Practice of Universal Banking in Nigeria”). The CBN now proposes to abolish it universal banking model in order to achieve its stated aim of having banks focus on their core banking business. Applied Capital Market’s Comments
We agree with the proposed abolition of the Single Licence aspect of the Universal Banking Model. Though we believe a financial group should be permitted to conduct different financial activities, but these should be done under the Holding Company Model proposed by the CBN. other articles
Given that three different regulatory authorities are responsible for the supervision of the three main financial sectors (banking, securities and insurance), it is not appropriate that a single regulatory licence obtained from the CBN should be sufficient to enable the carrying on of different activities. We also agree that regulatory licences should be linked to the actual activities of an institution, not just a blanket one.
differing minimum capital base requirements on different bank types. Below, we set out some of the reasons for holding these opinions.
We also believe that no financial institution should hold a licence for an activity that it does not, and does not intend to, carry out in the short term.
• I nternational banks: We believe that the minimum capital base requirement of N100 billion is excessive and is wholly unnecessary in order to obtain the permission of the CBN to operate a foreign subsidiary. The reasons for this view are:
• R egulatory arbitrage and level-playing field concerns: The classification into regional, national and international will result in an unlevel playing field for the participants in the banking market. This will severely hinder competition which, as you know, is essential for economic growth, choice within the market as well as an efficient market for consumers. In a given segment of the The prudential and other financial risks inherent in banking, country, the national and regional banks will be competing for the securities and insurance activities differ greatly and should not be same deposits and for the provision of banking services but the confused. For example, liquidity risk is particularly acute for depositnational banks will have a competitive disadvantage as a result of taking banks while it is relatively less of an issue for, say, the insurance having to have a significantly higher capital base requirement. sector given the differing speeds with which either may collapse.
Classification of Commercial Banking Activities The CBN’s Proposal
In the proposed new regime, commercial banks (and the associated licences) would be classified by reference to: coverage, location and operations. The three proposed classifications are:
Regional Banks: Subject to a minimum capital base requirement of N15billion, operations to be in a minimum of 5 and a maximum of 10 contiguous states, and must have the word ‘regional’ in its name. Its activities are the same as national banks except that regional banks cannot act as settlement banks. National Banks: Subject to a minimum capital base requirement of N25billion, allowed to operate in Nigeria only (all 36 states and FCT), can conduct all financial activities except insurance underwriting, loss adjusting services, re-insurance services, asset management, broker/ dealer, issuing house/underwriting and proprietary trading. International Banks: Subject to a minimum capital base requirement of N100billion, allowed to operate in Nigeria (all 36 states and FCT) and overseas. Applied Capital Market’s Comments
While we appreciate that the CBN’s proposals are intended to enhance the stability and diversity of the banking sector in Nigeria, we have a number of reservations about this proposal. It is important that measures implemented for the purpose of reforming the banking sector should not be in conflict with the national goal of increasing savings as well as banks’ provision of financing to the real economy. We can see no business/economic justification to distinguish between national and regional banking. We also believe that specialised banking models (such as Sharia or non-interest banking, Microfinance Banks etc) would achieve the main purpose of regional banking. But lower capital base requirements and geographical restrictions (i.e. embedded regional constraints features) will not achieve the desired goal of grass-root banking and boost savings.
Therefore, we strongly disagree with the proposed classification of commercial banking activities into regional, national and international banks. We can decipher neither a sound policy rationale nor an economic imperative to necessitate such classifications. Further, we disagree with the proposed imposition of 30
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• Th e deposits of the foreign subsidiary will be insured by the relevant country’s deposit insurance scheme and not the Nigeria Deposit Insurance Corporation. • S ince the proposed changes include a requirement to ringfence banking activities and assets away from others under the Holding Company model, there is no need to impose a significantly higher capital base requirement. • I ncrease in regulatory capital base requirements may deter real sector growth because capital would be idle in order to meet regulatory requirements. • S ince one of the main aims of increasing the capital base requirement is to reduce or eliminate contagion effects from banks’ international operations, in order to immunize Nigeria from these, we propose these: • H igher minimum qualifying capital to risk weighted assets ratio (of, say, 12%); • Compliance with Basel 2 and IFRS; and • A dditional risk-asset stress tests, such as stress on fungibility of capital (ability to move cash/capital between regulated entities within a banking group in times of stress), diversification benefit (risk offset between entities or risk exposures), and liquidity risk (the risk that cash sources are insufficient to meet cash needs under either current conditions or possible future environments. • R egional banks definition: The definition of a regional bank is ambiguous. There would need to be a well defined classification along the lines of, perhaps, political or constitutional structures. urpose of the capital base requirement: The minimum • P capital base requirement is not a risk-sensitive measure and is therefore there merely to serve as an effective barrier to entry for firms that are not sufficiently capitalised so as to give us confidence in the strength of the banking sector. The figure of N25bn was imposed in view of the many banking crises that Nigeria had suffered in the past few decades. Should the CBN wish to review the continuing appropriateness of N25bn as the minimum capital base requirement, this would be a different
matter. But varying it according to the geographical spread of a bank is, in our view, unnecessary and counter-productive.
globalization and the liberalization of the financial services industry. There are also, as you are aware no doubt, diversification benefits through reduction in the resources required to manage risk and lower costs of capital which in turn results in lower pricing of services to consumers.
• G eography and risk: We are of the view that the riskiness of a bank’s activities does not change according to its geographical spread. In fact, it may be argued that a bank is better able to So, we support the CBN’s proposed HoldCo model as a way of manage concentration risk by enhancing its geographical spread. maintaining the universal framework in a sustainable manner, and Therefore, it may well be that a national bank is actually safer than without creating unnecessary bottlenecks and panic (the type that usually a regional bank, whereas the latter has a much smaller capital accompanies regulatory changes). base requirement to contend with. This means that the proposed changes, though seemingly well-intentioned, may have a counter- Our reasons for supporting this model are that: productive effect. • B enefits of international expansion: Similarly, the mere fact that a Nigerian bank chooses to establish a subsidiary overseas does not necessarily increase its risks and it certainly does not increase its risk four-fold. The nature of the “group risks” to which such a banking group is exposed may change as a result of a foreign investment and these should be factored into the consolidated supervision of the group by the CBN. However, an overseas investment may offer diversification benefits as well as business expansions opportunities. It also allows Nigerian banks to cater for the significant group of Nigerians in the diaspora who require “diaspora banking services”. Note that the diaspora contributes significantly to the economy of Nigeria – a fact publicly acknowledged by the Federal Government.
• it is good for recovery and resolution plans to be utilised in a time of stress (and so helps address too-big-to-fail problem as well); and
Therefore, a measure that is intended to serve as an entry requirement and an effective barrier to those not sufficiently capitalised should, by its very nature, be a straightforward, non-complex and, perhaps more importantly, uniform measure. This measure should neither vary nor fluctuate.
• a n effective monitoring system to ensure that retail deposit are not used to fund proprietary trading for instance.
It is right that prudential capital requirements, on the other hand, should vary according to the riskiness of the assets of a given bank.
The HoldCo-based Universal Banking Model The CBN’s Proposal A Holding Company (HoldCo) shall own a bank (or banks) and may also engage in other financial services activities closely related to banking but only through non-bank subsidiaries. The HoldCo will be permitted to own entities that perform banking, clearing house activities, capital market activities, insurance services or such other services permitted by the CBN. The HoldCo will be required to be regulated by the CBN when a licensed bank decides to expand into other type(s) of banking or financial services (such as insurance, asset management, brokerage etc), and if a shareholder owns or controls a minimum of 20 percent of one bank, the same level of ownership is exerted on other financial institutions within the holding company. It is worth pointing that this proposed HoldCo structure is similar to Financial Holding Companies in the USA, created by the Gramm-Leach Act (also known as the Financial Services Modernization Act of 1999). Applied Capital Market’s Comments HoldCo Framework: We commend the efforts of the CBN in recognising the importance of universal banking which itself stems from
• it can help to preserve or maintain the status quo in terms of multiple business lines and participation in different financial sectors but without generating unnecessary regulatory panic. However, we are concerned about: • imprecise definitions of allowable activities; • the absence of an efficient legal framework; • the absence of a holistic regulatory and risk framework; • insufficient measures to constrain on intra-group exposures to make the changes more effective; and
Further, the HoldCo model looks at things purely from a banking point of view, perhaps to be expected given the CBN’s remit. But there needs to be some consideration of what happens from the other side. For instance, if an insurance entity holds or exercises control (>50%) or significant influence (>20%) over a bank, is there any need for a HoldCo? If yes, who will supervise the HoldCo? The present framework is one-directional, so there is a need for a comprehensive framework to discourage any regulatory and policy loopholes and arbitrages. We therefore encourage the CBN to engage other regulators such as the National Insurance Commission in facilitating a coherent set of reforms.
Conclusion Applied Capital Market Ltd (ACM) welcomes the CBN’s aims of enhancing the quality of banks, ensuring financial stability and promoting the evolution of a healthy financial sector. We hope you find our comments constructive and helpful as you go through your undoubtedly challenging process of policy development. We also think that, in line with international standards, the CBN should do a Quantitative Impact Study (QIS) to understand what the economic impact of the proposals might be. This should also include a detailed Cost Benefit Analysis (CBA). On a more general note, the CBN should, in future publications, endeavour to have a Market Failure Analysis (MFA) setting out exactly what the market failures are that it is trying to correct with the introduction of any new proposals. It should also detail alternative policy solutions that have been considered and discarded, together with the pros and cons. The timeframe of two weeks is also a little bit short in order to engender a proper debate in the industry. other articles
African Capital Markets Updates
Capital Market Updates
he combination of policy stimulus and cyclical inventory adjustments has boosted demand, and world trade has picked up in 2010. The data on the world’s largest economies in 2010 show signs of possible sustainable recovery, as evidenced by data on manufacturing output which is at a 5 year high, consumer sales which is up significantly and new hiring by companies. These early signs of optimism in economic activity in the advanced economies and the emerging markets are sparking demand for commodities such as crude oil. For instance, crude oil prices have increased and traded at close to US$88 per barrel in the first week of April 2010, the highest level since 2008, as a result increase in demand for commodities. Equity markets gave positive returns between December 2009 and December 2010 for African stock markets. The Ugandan All Share Index (USE ALSI) and Kenyan All Share index (NSE ALL) appreciated by 64% and 36% respectively over the period. In the same period, Ghana, Morocco, Nigeria, Zambia, Egypt and South Africa increased by 32%, 21%, 19%, 18%, 17% and 16% respectively.
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In the first quarter (Q1) and fourth quarter (Q4) of 2010, most of the African stock market indices witnessed significant recovery (except Mauritius and Malawi with declines of 1% and 4% respectively in Q1; and Kenya with a decline of 4% in Q4). The Nigeria All share index (NSE ALL) and Kenya (Nairobi All share index), appreciated by about 25% in Q1. For Q2 and Q3, there were no dominant patterns, as some appreciated while other declined over the periods. The Ghana All Share index appreciated in Q2 (10%) and Q3 (4%), but the Nigerian NSE ALL depreciated in both Q2 and Q3 largely due to banking stocks which constitute about 50% of NSE ALL (this may be attributed to the uncertainties surrounding the formation of the Asset Management Company of Nigeria (AMCON) designed to rescue ailing banks). See Chart 1, for more information on other African indices. CHART 1: STOCK MARKET - AFRICAN EQUITY MARKETS AT A GLANCE COUNTRY
Q1 '10 25%
Q2 '10 -2%
Q3 '10 -9%
Source: Bloomberg and Applied Capital Market (ACM) Ltd
EQUITY INDEX CHANGES IN Q1, Q2, Q3 & Q4 2010
For advanced economies, stock markets CHART 2: STOCK MARKET - WORLD MARKETS AT A GLANCE appreciated in Q1 and Q4 of 2010, as a result of the positive impact of economic COUNTRY INDEX Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Q1 '10 Q2 '10 recovery, but depreciated in Q2, because UK FTSE 100 5,413 5,680 4,917 5,549 5,900 5% -13% of concerns over possible sovereign default USA SP 500 1,115 1,169 1,031 1,141 1,258 5% -12% in some European Union countries such as EURO-ZONE E300 1,046 1,079 993 1,061 1,122 3% -8% Greece, Spain, and Ireland. Overall year-on- FRANCE CAC 40 3,936 3,974 3,443 3,715 3,805 1% -13% year returns were 16%, 13%, 9%, 5%, -3% for GERMANY DAX 5,957 6,154 5,966 6,229 6,914 3% -3% German, US, UK, Hong Kong, and France HONG KONG HSEG 21,873 21,239 20,129 22,358 23,035 -3% -5% equity indices, respectively. JAPAN NIKKEI 225 10,546 11,090 9,383 9,369 10,229 5% -15% BRAZIL
Source: Bloomberg and Applied Capital Market (ACM) Ltd
EQUITY INDEX CHANGES IN Q1, Q2, Q3 & Q4 2010
In terms of risk in equity markets, volatilities of returns in each country’s equity index is used as a measure of risk. Amongst African equity markets in 2010, the Nigerian equity market was more volatile compared to others; this was due to uncertainties in regulatory reform and the terms of bank bail-out programmes. Table 1, shows the annualised volatilities (measured as a standard deviation of daily index return), for 2008, 2009, and 2010 and by country.
The changes in volatility by year, demonstrate the non-constant nature of volatility. Volatility risk was particularly high in 2008 and 2009 for developed countries (as result of the credit crisis) and for African countries in 2009 (due to the delayed spread and contagious effects of the 2008 global financial crisis).
TABLE 1: VOLATILITY OF AFRICAN AND DEVELOPED ECONOMIES’ EQUITIES COUNTRY
Source: Applied Capital Market (ACM) Ltd
The correlation between African stock TABLE 2: CORRELATION BTW AFRICAN EQUITIES AND DEVELOPED markets and developed markets’ stock indices ECONOMIES’ EQUITIES ( Jan 07 to Dec 2010) were positive (except the Ghanaian index COUNTRY FTSE 100 S&P 500 EURO NIKKEI 225 which was negatively correlated, but the NIGERIA 59.9% 73.4% 72.6% 71.7% correlation was weak). The African Frontier GHANA -50.6% -40.6% -44.1% -40.3% markets (Nigeria, Kenya, South Africa, and KENYA 85.4% 89.3% 87.9% 81.6% Egypt) were strongly positively-correlated EGYPT 81.5% 86.9% 81.9% 75.8% while others were weakly positivelyMOROCCO 41.8% 51.0% 41.0% 34.1% correlated (see Table 1). This demonstrates S.AFRICA 83.0% 76.3% 65.1% 50.6% that African capital markets are integrating MAURITIUS 47.4% 42.3% 27.5% 10.0% into the wider world economy, hence UGANDA 48.5% 45.2% 34.3% 19.9% reduction in diversification benefits. Source: Bloomberg and Applied Capital Market (ACM) Ltd
Most African currencies appreciated against the US dollar between December 2009 and December 2010 (except South African and Namibian currencies; see Chart 4). The appreciation of some currencies was attributable to increased commodity prices, which resulted in increased foreign exchange reserves, as a result of US dollar inverse relationship with commodity prices (compare Chart 3 and Chart 4). In Q2 09, most African currencies depreciated against the US dollar with the exception of the Nigerian naira and Botswana’s pula.
CHART 3: CURRENCY MARKET - AFRICAN MARKETS AT A GLANCE COUNTRY
MAURITIUS RUPEE MALAWI
*Francophone Africa countries: Benin, Burkina Faso, Côte d’Ivoire, Mali,Niger,Togo, Guinea Bissau, Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, Senegal and Gabon. Source: Bloomberg and Applied Capital Market (ACM) Ltd
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FX CHANGES AGAINST US DOLLAR IN Q1, Q2, Q3 & Q4 2010
Overall the commodity market out- CHART 4: COMMODITY MARKET - WORLD MARKETS AT A GLANCE FX NAME Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Q1 '10 Q2 '10 Q3 '10 performed other asset classes (equity, fixed COUNTRY GOLDS 1,097 1,113 1,242 1,308 1,422 1% 12% 5% income) over the course of 2010. Silver, GOLD SILV 17 17 19 21.8 30.90 4% 7% 17% Gold, Platinum and Diamond increased by SILVER BRENT 78 81 75 82 95 5% -8% 10% 82%, 30%, 21%, and 17% as at December CRUDE OIL 2010 compared to December 2009. One of BRT BONNY 79 83 75 83 96 5% -10% 11% the reasons for increased demand for these CRUDE OIL commodities was increase in demand by BNY PLPH0AAI 113 119 125 126 132 5% 5% 1% investors for higher quality assets (that are DIAMOND PLAT 1,466 1,644 1,534 1,657 1,769 12% -7% 8% less susceptible to erosion in asset values). PLATINUM 76 75 76 102 144 -2% 2% 33% Further, the demand for commodities COTTON N' 2 COTTON N2 COFFEE AR 168 164 191 216 262 -2% 17% 14% was enhanced by manufacturing demand COFFEE (especially from China) and the perception ARABIC COFFEE RB 1,418 1,422 1,731 1,726 2,095 0.3% 21.7% -0.3% of greater risk in holding government debt. COFFEE Chart 4 depicts major commodity markets ROBUSTA at a glance with a graph of quarterly changes. Source: Bloomberg and Applied Capital Market (ACM) Ltd
Q4 '10 9% 42% 15%
5% 7% 41% 21%
FX CHANGES AGAINST US DOLLAR IN Q1, Q2, Q3 & Q4 2010
From discussions of recent developments to forward looking analytical articles, ACM-Insight! is right on the ball when it comes to the developments taking place in African economies with special insight into capital and financial markets. ACM-INSIGHT! Into The African Banking, Insurance And Capital Markets
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Ghana’s Financial Market
A criticAl insight into ghAnA’s fAst growing finAnciAl mArkets sector
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The state of Ghana’s Economy An AnAlYticAl oVerView of ghAnA’s economY
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Corporate Bond Market Hullabaloo! African Capital Markets Update Kenya’s Market At A Glance
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ACM’s 2011 Sub-Sahara Frontier Economies Kenya: Kenya’s economy has a very strong positive 2011: expected increase in investment to be driven by a robust consumption growth outlook, political stability, booming commodity exports, and likely further sovereign credit rating upgrades as a result of sound economic fundamentals. This should also create the fiscal basis for accelerated infrastructural spending.
Nigeria: Growth will probably be dull even though pre-election spending should support consumption. ACM anticipates a negative 2011 outlook, as a result of political uncertainty, with down-risk in regulation reform and fiscal policy sustainability. We expect inflation rate to between 13%-15%, growth rate of 4.5% in 2011, and possible negative outlook on sovereign ratings. The presidential elections in 2011, is likely to create major volatility in the markets, and instability in the political climate. Our base case remains a People Democratic Party (PDP) election victory once again, but the concern is the ruling PDP’s internal politics, given the furore over regional zoning which has created internal division within the party (leading some to challenge the right of incumbent President Jonathan Goodluck to contest for president). Reforms are likely to remain paused in the meantime, but we would expect to see them gain momentum in Q3 and Q4 (i.e. after the elections).
We also project further deepening of the capital markets, as a result of increased liquidity in both the equity and bond markets. The 2010 growth will be sustained as a result of the increase in prices for some of Kenya’s main commodity exports (tea and coffee). 2011 outlook is positive hence the Central Bank of Kenya (CBK) forecast growth of 4.2% for 2011 is reasonable. The down-side is a possible increase in inflation, as a result of fall-out effect of increase in oil-prices, which may result in increase in energy prices (since energy prices are not subsidised in Kenya). Similarly, preparation towards the 2012 election is likely to slow down fiscal policy activities and weaken the coalition government; and hence, may retard growth and influence inflation rates. The country’s exports are vulnerable to both international prices and weather conditions, and, so, fall in commodity prices and bad weather condition are potential downside risks. Ghana: 2011 growth is will likely be influenced strongly by revenues from oil exports, hence increase in economic activities, capital market, foreign direct investment and the increase in non-oil revenue (due to hikes in income, goods and services taxes) are expected. We expect the growth of 9% (less than the 12.3% projected in 2011 budget), inflation of 11% (greater than Bank of Ghana’s targeted inflation of 9%), and strong positive sovereign ratings. The 2011 budget targets a deficit of 7.5% of GDP, less than the 9.7% for 2010, but higher than our expectations. Since the 2011 budget depends on oil revenue of GH¢584 millions ($401millions), although less than 10% of the total revenue, but Ghana’s revenue is highly susceptible to volatility in international Oil, Gold and Cocoa prices; hence, likely to affect current account and inflation and, to some extent, policy rates.
The up-side is that the proposed 2011 budget is about 10 per cent less than that of 2010 estimation, and based on a conservative average oil price of $65 (less than our projected average oil price of $80 per barrel), hence likely increase in foreign reserves and appreciation or stability of the naira, with resultant growth if the excess revenue is The down-side is the anticipated effects of oil risk, such as over-dependence on oil, possible utilised in improving infrastructure and neglect of other sectors, increase in cedi against major international currencies, hence fuel alleviate poverty. local demand for foreign goods without increase in production thus leading to export-import trade imbalances. Also, due to impact on crude oil prices and the significant build-up in The down-side risks are: (i) regulation risk foreign exchange reserves arising from inflows of private capital in the money markets and introduced by lack of an institutionalised in foreign direct investment. The Bank of Ghana may be forced to react to lingering high regulatory framework; and (ii) political risk. inflation with a rise in policy rates (from 13.5% to 14.5%) though there is a risk that policy Our base case is that Jonathan wins the 2011 will remain unchanged and focused on growth rather than inflation. presidential election, but if an opposition party wins, there is a risk that most of the recent banking reforms (especially the repeal of the universal banking model) may be reversed. A substantial and unexpected rise in international oil prices could trigger an administered local fuel price increase (if the proposed removal of oil subsidies is implemented) and a steep increase in inflation. regular features
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Kenya’s Market At A Glance
It is officially known as Republic of Kenya, located in East Africa, with a population of 37.9mn (UN 2008 estimates) and size of 582,650 km2. It capital is Nairobi and official language is English/Kiswahili and currency is Kenyan Shilling (KES). The Kenya’s economy depend on commodities (tea, coffee, horticultural products, petroleum products, cement, pyrethrum, soda ash, sisal, hides and skins, fluorspar) exports. Kenya has external debt of $6.94bn (as at June, 2010 estimate) and foreign reserves of about $4.1bn (as at Sept 2010). It relies relatively heavily on customs and excise duties, which represent close to 50% of total revenue. The total public external and domestic debt was equivalent of 21.6% of GDP at the end of December 2008. 40
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he economic growth rose to a two-decade high of 7.3% in 2008. Kenya’s legal system is based on English common law and common law court precedent. It is based mostly on sound principles, although in some areas it does not reflect modern approaches to regulating investment and commercial transactions. Actual practices also do not necessarily respect the spirit and principles of the law, although the constitution provides for an independent judiciary, the president has considerable influence over the judiciary. The president appoints and dismisses the High Court Judges with the advice of the Judicial Service Commission. S&P rated B+ for both long term and short-term ratings, with positive outlook, as at Nov 2010, as results of fallen in political risks and projected economic outlook to improve and gross domestic product is expected to expand 5.4 percent in 2011.
Financial Sector The Central Bank of Kenya (CBK) was established in 1966 through an Act of Parliament - the Central Bank of Kenya Act of 1966 and amended Central Bank of Kenya Act in April 1997. It core mandate of the Bank are: (1) to formulate and implement monetary policy directed to achieving and maintaining stability in the general level
of prices; (2) to foster the liquidity, solvency and proper functioning of a stable market-based financial system; and (3) subject to (1) and (2), to support the economic policy of the Government, including its objectives for growth and employment. CBK also have overall supervisory and regulatory authority in all matters relating to banking sector.
payment of interest on the securities. The govt securities market is considered relatively liquid, while corporate bond market is very illiquid. In January 2009, the Central Bank of Kenya issued the first Infrastructure Bond for a total value of KES18.5bn to finance specific projects in the Roads, Energy and Water sectors.
The bond is has actively traded in the secondary market, owing to the In 2004, the government introduced a comprehensive Financial large size and higher yields. The bond market has recently received Sector Reform Strategy that calls for changes to the Banking Act, considerable interest from investors, evidenced by the increased including the transfer of operational and licensing powers from liquidity in the fixed income market. This may be attributed to the Minister of Finance to the CBK. The government influences investors preferring guaranteed returns in the bond market at a time the sector through state-owned banks, including the large, state- when the NSE performance is on a declining trend. The settlement is controlled Kenya Commercial Bank and the National Bank of on T+5 and the day-count convention are Actual/364 and Actual/365 Kenya. From 2012 bank core capital would be KSH 1bn from the for Govt bonds and T-Bills, respectively. current KSH 250m. Kenya has 43 insurance companies (20 general insurance only, seven long term business only and 15 composite Foreign Exchange (both life and general)) which are regulated by the Office of the The Kenyan Shilling (KES) is a managed floating currency. Commissioner of Insurance. Foreign exchange controls were relaxed in 1995 and foreigners The Insurance Regulatory Authority (IRA) became operational are able to repatriate all income, capital and profits freely. The towards the close of 2007. This will enhance the regulatory central bank maintains a minimal intervention approach in the environment of the industry and increase the minimum capital foreign exchange market and when it intervenes, it does so only requirement for insurance companies to KES 300m for general, KES for smoothing out disorderly trading activity. The KES has been 150m for life and KES 450m for composite insurance companies on an appreciating trend since 2004. As of Nov 2010, it closed at KES 80.25 per USD$ 1. with full compliance expected by 2010.
The Capital Markets Authority (CMA), which comes under the Capital Markets Authority Act, regulates the capital markets. Kenya capital market was started in the 1920’s by the British as an informal market for Europeans only. In 1954, the market was formalized through incorporation into a Nairobi Stock Exchange (NSE), with its own set of listing regulations, and responsible for approving the listing of new issues.
Kenya’s tax system is relatively straightforward and is not widely used to provide targeted sectoral incentives. The administration of the system is efficient and fair relative to other developing countries. The rate for withholding tax are 15% and 10% for long-term debts and 0% for debts used for infrastructure development, while the tax rate for bearer securities is 25%. Government securities are exempt from withholding tax. Newly listed on the NSE are taxed at either 25% or 27% for first five years of their listing if they float a minimum In 1963, Africans were allowed to join and trade in the market. of 30% or 20% of their capital, respectively. Resident companies are The NSE listed company’s shares and bonds of both local and taxed at a rate of 30% of earnings, regardless of sector of operation multinational corporate. As end of July, 2009 there 57 listed and ownership, while local branches of non-resident companies companies with a total market capitalization of KES 1,169bn are taxed at a rate of 37.5%. Kenya has double tax treaties with (USD 14.5bn). For any listing on the NSE, a minimum of 25.0% the United Kingdom, Germany, India, Canada, Norway, Sweden, of the issued share capital is reserved for resident investors while the Denmark, Zambia, France, South Africa, East African Community balance becomes a free float for all classes. and Thailand. The NSE has signed Memoranda of Understanding with the Ghana Stock Exchange, the Nigerian Stock Exchange and the other two East African Securities Exchanges (namely the Uganda Securities Exchange (USE) and Dar es Salaam Stock Exchange (DSE), Tanzania) for cross-border listing of securities quoted on their markets.
Fixed Income & Money Market The CBK issues treasure bills (91, 182 and 364 days) on weekly and treasury bonds (tenor of 2-15 years) on monthly using multiple price auctions with both competitive and non competitive bids accepted in all auctions. The non competitive price is established as a weighted average of all accepted competitive bids. The CBK acts as an agent for Government with respect to issuance of government securities, maintenance of the domestic debt register, and redemption and
Entry Restriction The Investment Promotion Act (2004), makes it mandatory for foreign investors to apply for Investment Certificate from Kenya Investment Authority (KIA) with minimum capital limit of USD$ 500,000. There are also formal limits on foreign for companies listed on the NSE of at least 25 per cent national ownership. However, foreign investors are permitted to participate in both govt debt and equity issues. Sources: The Central Bank of Kenya; Nairobi Stock Exchange; Kenya National Bureau of Statistics; Africa Development Bank; International Monetary Fund; Central Intelligence Agency (CIA); United Nation Development Programme (UNDP); Organisation for Economic Co-operation Development (OECD). regular features
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– april 2011
Contributing experts Dr. Tunde Akodu BSc, MSc, PhD, FRM Tunde has a PhD in Actuarial Mathematics & Statistics from the Heriot-Watt University, UK, an MSc in Applied Statistics from the University of Oxford, UK and a First class BSc. honours degree in Statistics from the University of Ibadan, Nigeria. Tunde is an expert in capital market project finance with specialization in emerging market structured finance, commodity and revenue linked financing, revenue monetization and securitization, hybrid capital raising, debt restructuring and structured products (CDO, ABS, Equity/credit/commodity/insurance-linked notes, and hybrid notes), and portfolio optimization. He is an FSA (Financial Services Authority in the UK) qualified risk and investment advisor, certified Financial Risk Manager (FRM, the Global Association of Risk Professionals, (GARP)), Fellow of the Royal Statistical Society, London and Member of the Securities and Investment Institute, UK, and The Royal Commonwealth Society, Oxford Branch, UK.
Mr. Ola Omoyele BSc, MSc, MSaRS Ola has an MSc in Quality Management, Statistical Methods and Reliability from the Centre for Risk Management, School of Engineering and Mathematical Sciences, City University, London and a BSc. in Software Engineering from the University of Westminster, London. He has undertaken specialist courses in Risk Management, Project Management; Risk Management in Banking & Finance, Data Analysis in Financial Economics and International Finance. He holds a Certificate in Risk Management from the Association for Project Management (APM). Ola is an expert in statistical risk management, reliability, quality improvement, risk assessment, risk analysis and risk modelling. He has extensive experience in the management of risk, cost and project evaluation, and application of project management techniques in the design, build, modernization and maintenance of railway projects in the UK as well as other infrastructure projects. He is a Member of the Institute of Risk Management (IRM), the Global Association of Risk Professionals (GARP), Fellow of the Royal Statistical Society (RSS), Member of the Safety and Reliability Society (SaRs), the Professional Risk Managers’ International Association (PRMIA) and the National Society of Black Engineers (NSBE), USA.
Mr. OlU Omoyele LLB, LLM, ACSI Olu has an LL.M. (Master of Laws) in Commercial and Corporate Law focussing on international financial law, regulation of the conduct of mergers & acquisitions and securities regulation, from King’s College, University of London. He previously studied at the University of Greenwich, London (LL.B. Law) and the College of Law, London (Postgraduate Diploma in Legal Practice) where he studied, inter alia, corporate finance law. Olu is an expert in corporate & financial law and financial regulatory policy and has published several articles in leading legal journals. One of such articles, “Continuing obligations of listed public companies: a critical analysis” has now been featured in a major book – a five volume collection of classic and contemporary business law articles of the past 50 years, titled: “Hardy, ST, and Butler, M (eds), International Themes in Business Law” (Sage Library in Business and Management, 2007) Vol. 3. He is a Member of the Financial Services Lawyers Association (FSLA), UK; a Member of the British Nigeria Law Forum (BNLF); an Affiliate Member of the Global Association of Risk Professionals (GARP); an Associate Member of the Chartered Institute for Securities and Investment (CISI), UK; and a Member of the Law Alumni Advisory Board of King’s College, University of London.
focus on ghana
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Into The African Banking, Insurance And Capital Markets
AN APPLIED CAPITAL MARKET LTD (ACM) PUBLICATION
JAN – APR 2011
GHAnA Ghana’s Financial Market
A criticAl insight into ghAnA’s fAst growing finAnciAl mArkets sector
The state of Ghana’s Economy An AnAlYticAl oVerView of ghAnA’s economY
Eureka! oil In Ghana
A detAiled AnAlYsis into the recent oil discoVerY in ghAnA
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Corporate Bond Market Hullabaloo! African Capital Markets Update Kenya’s Market At A Glance
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